NEW DELHI: The Centre proposed a four-slab structure with two standard goods and services tax (GST) rates of 12% and 18% at the latest meeting of the GST Council, keen to ensure minimal impact of the new levy on prices and revenue. But some states called for a higher rate on luxury goods. The issue of compensation to states was sorted out at the first day of the three-day GST Council meeting, marking further progress on the much-awaited indirect tax reform, which the government wants to put in place by April 1.
The Centre’s proposal to the council entails a lower rate of 4% for precious metals, a threshold rate of 6%, two standard rates of 12% and 18%, a higher rate of 26% and a cess on luxury items, pan masala and tobacco products. Services will be taxed at 12% and 18% under this dispensation. Most services would be taxed at 18% but those that have abatement will face a levy of 12%. “At least five alternative options on rate structure have been presented to the council,“ Finance Minister Arun Jaitley told reporters after the day-long session.“Eventually, you must reach the target of revenue collection which you are likely to otherwise reach in 2017-18… Whatever has been suggested is a starting point.“
He elaborated on the guiding rule for the new tax. “The broad approach is that the rate structure should be such that it does not lead to any further CPI (consumer price index) inflation and the states have adequa te revenue, so should the Centre, in order to discharge their obligations and this has to be blended with only the least possible burden that has to be put on the taxpayer,“ he said. Revenue Secretary Hasmukh Adhia said the proposed rate structure takes into account the existing tax incidence on goods and the Centre was keen that goods that do not face any tax or face lower tax suddenly don’t face a higher rate, hurting consumers.
Some goods such as consumer durables that face a higher tax rate of 31% now, including central levies and state taxes, could be moved to the lower bracket of 18% instead of 26%, the highest slab. “As many as 50% items in the CPI basket would not face tax,“ he said. This would keep food and most items of common usage out of tax bracket. The Centre has also proposed diffe rent rate scenarios for the standard and threshold rates of 18%,12% and 6%, respectively . In one scenario, standard rate is proposed at 17% and threshold at 7%, said an official privy to Tuesday’s deliberations.
ADDITIONAL RESOURCES FOR CENTRE
Jaitley, who also heads the council that has state finance ministers as members, said the model should be such that the Centre has some additional resources that it could use for paying compensation to any state losing revenue. This could explain the move to levy the cess, which will entirely accrue to the Centre, a proposal some experts . say will distort GST. The cess on ultra-luxury goods such as high-end cars would be equal to 26% minus the current tax incidence. All existing cesses will be folded into GST except the clean energy cess levied on coal.
The proposed cess on luxury goods would help create a compensation fund to help states that sustain any loss of revenue due to the new indirect tax regime that will subsume a host of central and state taxes including excise duty , service tax and value-added tax (VAT). Jaitley said all these were proposals on the table. “These are all possible suggestions, we have not come to a possible decision,“ he said. Kerala Finance Minister Thomas Isaac said his state wanted the highest rate to be fixed at 30% so that items of common consumption would either be exempt or face lower tax rates. He also said the Centre’s proposal to impose a cess to compensate states “is in contradiction with the concept of the GST itself“.
The view was seconded by experts. “The ability of the government to levy cess even if on some commodities at present may open a Pandora’s box for levy of more cesses later, which will ultimately raise the tax burden,“ said Bipin Sapra, partner, EY. The council will meet on Wednesday to discuss the GST framework and finalise the cross empowerment structure for administration of the tax, essentially giving powers to each other over assessees. The first day of the three-day meeting finalised the compensation formula that entails a secular revenue growth of 14% for tax revenue of states on the FY16 base year over the five-year compensation period. The council also decided what would constitute revenue, which would include all taxes subsumed into the proposed tax.
Credits ET Realty